How Zero-Based Budgeting Can Help You During COVID-19

• Author: Chris Remington
• Posted: 2024-10-23

COVID-19 has thrown many people's finances into disarray as they struggle with the effects of job loss, furloughs and reduced income. Many are having to make do with less. What is more unfortunate is that people are having to dip into the savings that they spend a lifetime accumulating. In order to minimize the hit that people are taking, they should switch to a different way of budgeting that works better in a crisis. In these tough economic times, you need to consider zero-based budgeting for your own personal finances. In some cases, it may make the difference between staying afloat and drowning in debt when you ask yourself the tough questions.

What Is Zero-Based Budgeting?

Zero-based budgeting is a method that many companies use to balance their own books. It forces them to look harder at their expenditures by making them justify every penny that they spend. In general, companies start from zero and need to rationalize every expenditure that they make. When it comes to your personal finances, the overall goal is that your salary minus your expenditures will come out to zero in the end. This is where the "zero" in zero-based budgeting originates. It is a budget method that is well-suited for tough times such as these.

How Zero-Based Budgeting Works for Personal Finance

The important thing to remember about zero-based budgeting is that every dollar that you have coming in must have a name assigned to it. It has a role to play in your monthly lifestyle. You will start from the expense side and work up from there. In other words, every cent must be accounted for at the end of the month whether you end up spending it or not.

First, you will begin with your major expenses such as your mortgage or rent and your car payment. You will then add up the rest of your expenses one by one until they reach your amount of income. Do not feel the need to spend every penny that you make in order to live up to your means. Instead, if you have money left over each month, you can allocate it to savings, investing or paying off debt. Having to justify each and every single one of your expenditures will help you cut the waste that keeps you behind each month. It makes budgeting an objective exercise where you need to be honest with yourself. Hopefully, you can ferret out some needless expenses that do you no good.

How This Can Help You During COVID-19

Even if you lost your job or have had your income cut, you can still benefit from zero-based budgeting during the coronavirus outbreak. You should just start with the amount of money that you have coming in and add it to the amount that you have the ability to take out from your savings for each month.

Ideally, during good times, you would have run multiple scenarios for your budgeting. You would have had a budget for a regular earning month and another one for when there is not as much money coming into your account. Now, it would be a case of executing your backup plan.

If you already have a zero-based budget but do not have models already run for the conditions that you are facing during COVID-19, you can make the necessary adjustments. The key is that you need to be flexible in changing your assumptions. Of course, when your income has been reduced, you need to acknowledge and accept the fact that you are working within different parameters as opposed to hoping that your old salary comes back shortly.

You are going to need to do your work on the expenses side. The best thing to do is to start from zero when you are tallying up what you spend. Go through the trouble of justifying everything that you spend from the ground up one more time. Consider either reallocating some resources or getting rid of certain expense categories altogether right now.

The good news is that once your income does return to a more normal level, you will heave a bit more breathing room having gone through the exercise of critically questioning your spending. At that point, you can take more money and assign it to savings every month along with a general easing of some of your more extreme fiscal discipline that you will have had to practice.